QE2 sounds like a luxury ocean liner. But many wonder if the
Federal Reserve's second round of "quantitative easing" would be
more aptly named the Titanic.

A week ago, the nation's central bank announced that it would
buy $600 billion in long-term U.S. Treasury bonds, ostensibly to
push down long-term interest rates.

This comes on top of $1.25 trillion in mortgage-backed
securities that the Fed has sucked up in the last couple of years.
Despite its enormity, this intervention has done little to kick the
economy back into action.

I'd be staggered by the numbers if they weren't so numbingly
huge.

One of the great things about my job is that I can get private
tutorials from people who actually understand this esoteric stuff.
So I asked some of the sharpest minds on Federal Reserve weaponry
to give me a QE2 primer.

I was surprised when a few declined the opportunity, saying they
need help, too.

"I have no idea how to make a chart of this," said Michael Poss,
the economist responsible for all of Ross Perot's famous
presidential campaign graphics.

Three former high-ranking Fed insiders, two university business
school deans and three investment fund managers answered the
call.

"The book has not been written whether QE2 is a good idea or a
bad idea," said Sam Manning, general partner of the Blagden Fund in
Dallas. "There are many highly educated, brilliant minds on both
sides of the argument."

But here are some basics about quantitative easing that just
about everybody I talked with agreed on:

• Turning government bonds into circulating money is called
monetizing the national debt.

• Quantitative easing is a euphemism for creating money out
of thin air. In the vernacular, we call it "printing money," even
though it really has nothing to do with the U.S. Bureau of
Engraving and Printing.

• The way it's supposed to work is that the Fed buys
securities in the open market, paying with a government "check."
(That's how the money is created.) The sellers deposit those checks
into their banks. The banks redeploy those deposits as loans to
consumers and business. The money supply expands and, in turn, so
does the economy.

Or so the theory goes.

• The money supply hasn't increased over the last two years
from the first round of quantitative easing. The trillion-plus the
Fed paid for mortgage-backed securities is still sitting in vaults
as bank reserves.

"The system is clogged" is how Bob McTeer, former president of
Federal Reserve Bank of Dallas, described it.

• Loan demand from creditworthy borrowers remains weak.
Banks are still smarting from previous bad loans. And they are
leery of lending money so cheaply when higher rates may be in the
offing.

• Almost no one thinks QE2 will send folks scurrying to the
banks to borrow.

"It is not as though you read the headline 'Fed to do $600
billion of QE2' and think, 'Oh, good, this will be good for our
business,' " says Cece Smith, a retired venture capitalist and
former chairman of the Dallas Fed bank.

"They are not going to add jobs based upon interest rates being
lower. They will add jobs based upon increased demand for their
products or services."

• The likely - and intended - effect is inflation.

The Fed is worried about deflation and the psychological effect
of our seeing assets such as 401(k)s, houses and stocks devalue.
It's the "wealth effect" in reverse. That's where we've been since
the crash of 2008.

"We've been flirting with deflation for two years," says Michael
Cox, former chief economist at the Dallas Fed bank. "That's really
bad for the economy. This is a carefully engineered yet somewhat
desperate attempt to get money supply to rise so that prices will
rise."

The Fed's saying that it wants to hold down long-term rates is
more palatable than saying it wants to use inflation as medicine.
But some fear that the cure could be worse than the disease.

Dallas investment fund manager Kyle Bass describes the policy is
a sleight of hand with the soaring national debt.

"We're trying to counter-cyclically spend. Push our problems
down the road. And never face the fact that we were too leveraged
as an economy," said Bass, who expects the dollar to take a
whacking. "I don't know how many of your problems that you've
kicked down the road ended up getting better later on. But in my
life, it's almost none of them."

Frankly, McTeer, who is now with the National Center for Policy
Analysis, thinks all this gnashing of teeth is overblown.

"Everybody's treating this as a very unusual, draconian thing
that's extremely risky, probably won't work and likely to have
adverse consequences. I think they're overdoing it."

But everyone agreed that the federal government is walking a
tightrope over an economic chasm.

If successful, the action will create a manageable inflation
rate that could push the stock market and housing prices higher,
entice businesses to go ahead with projects and banks to lend to
them.

If QE2 is too successful at unleashing money, inflation could
shift into hyperdrive. Then the Fed will have to engage a
completely different set of steering mechanisms.

Here's what the experts had to say.

Sam Manning, general partner, Blagden Fund

"The book has not been written whether QE2 is a good idea or a
bad idea. There are many highly educated, brilliant minds on both
sides of the argument.

"But if I were running the Federal Reserve of the United States
of America, I would err on the side of being cautious. What we do
not want more than anything else is to turn into Japan and have a
deflationary spiral."

How is buying back $600 billion in U.S. bonds being cautionary?
"There is a demand for fixed-debt instruments. You're able to print
money and keep interests rates low. Supply and demand. The federal
government will be able to sell its Treasury bonds every week,
every month, because the Fed is going to be there to buy them. That
creates demand for the bonds, keeps interest rates down low, for
now, until those bonds come due.

"It could create inflation, OK?

"But that could be a good problem to have. If we have a little
bit of inflation, hopefully that means the economy is growing
again. People are making money. Businesses are expanding. The
economy starts overheating a little bit.

"You would much rather have that problem to deal with than
deflation.

"In the '30s, people stopped spending money. There were plenty
of people in the world who still had money but they wouldn't spend
it, because they were so uncertain and they thought prices were
going down.

"If you put people in the position where they have no confidence
and don't want to spend money, then you create a deflationary
spiral, which is much worse than having to worry about a little bit
of inflation.

"If we do get inflation down the road, the Federal Reserve can
always raise interest rates and slow things down.

"So [Federal Reserve chairman Ben] Bernanke is erring on the
side of being cautious: Let's have a little insurance policy to
prevent a deflationary spiral, which happened in Japan. That's
turned into a disaster for the Japanese people."

Al Niemi, dean, SMU Cox School of Business

"The Fed is trying to put downward pressure on long-term
interest rates. I do not think this will be very effective in the
next six months or the next year. Long-term interest rates are
already at historic lows. The cost of capital is not what is
holding the economy back from a vigorous expansion.

"American households lost $14 trillion in their net worth in
this recession because of the drastic fall in home prices and the
decline in the value of their 401(k)s. Households are not spending
because they are scared and trying to replenish some of their
losses. Companies are not hiring because people are not
spending.

"In addition, companies do not know what is going to happen to
taxes next year, and they are not sure of what the changes in
health care will do to the cost of labor.

"Tinkering with long-term rates does not address the real issues
that are holding the economy down, so I think quantitative easing
is much ado about nothing."

But could it become much ado about something in terms of
inflation later on? "Absolutely - which is why I think we would
probably be better off if the Fed did nothing at this time."

Shad Rowe, general partner, Greenbrier Partners Ltd.

"Let's say you had some disease that you were trying to avoid.
So you took an extra dose of chemotherapy if you had cancer or
extra dose of quinine if you had typhoid. You're creating another
risk, but you're insuring that you've dealt with the previous
problem.

"QE2 is an insurance policy.

"As my son Adam points out, the one constant theme in American
history is that politicians do not deal with future problems. They
deal with current problems and leave future problems to future
politicians.

"The current problem is there's money everywhere, but no one is
doing anything.

"People are like quail sitting in their covey. They aren't
moving. Bernanke is trying to shake them out of the covey and fly.
And they will. They can't sit there forever getting no return on
their money.

"QE2 is like a big troop of hunters and dogs coming through the
fields. The covey of quail is going to flush.

"Wall Street is no longer a buy-and-hold kind of place. It's a
hedge-fund kind of place.

"If this works, I'll tell you the direction that stocks are
going. It's up. People who are short [in the stock market] are not
going to like it."

Kyle Bass, chief investment officer, Hayman Advisors LP

"The reason they call it quantitative easing and not printing
money is to obfuscate the truth as to what really is happening. The
more you call it what it is, the more problematic it becomes.

"We don't want deflation to happen. We'd like to create asset
price inflation. We want home values to move up again. And then the
debt write-down to the banks will be less. And we'll go on our
merry way.

"We're trying to counter-cyclically spend. Push our problems
down the road. And never face the fact that we were too leveraged
as an economy.

"Unfortunately, the debt of the United States is going to grow
north of 90 percent of GDP this year. The interest expense is
growing exponentially. We're going to have a much, much greater
problem down the road. And unfortunately down the road is not that
far away.

"I don't know how many of your problems that you've kicked down
the road end up getting better later on, but in my life, it's
almost none of them.

"In my household, when I spend twice what I make, I have to dial
my spending back. But in this crazy world that we live in, when the
U.S. is spending $3.6 trillion a year and we're only bringing in
$2.2 [trillion], we decide to spend more and fund it by printing
money."

So you think this is dangerous for the dollar? "Let's assume my
partners and I here at Hayman were Nobel Laureate chemists, and
we've figured out a way to convert any base metal in the world into
gold.

"And we make that press release. What happens to the price of
gold the next day? There's got to be some skeptics because we
haven't demonstrated that we can actually do it. But gold probably
drops $100 to $200 on the announcement.

"Then we start turning lead into gold and tell everyone we've
turned 10,000 ounces of lead into gold and say we're going to
convert more. Now what happens to the price of gold?

"That's what the Federal Reserve is doing. They're printing
money, and a lot of it. So the dollar drops.

"If you had a hundred dollars of currency in the system, and you
printed $10, you didn't just devalue the dollar by 10 percent, you
devalued it by 18 percent. There is the linear number or
quantitative 10 percent. But then there's the qualitative aspect -
the market's belief or disbelief in whether the system is working
properly.

"When you look at the history of hyper-inflation, it's not the
quantitative aspect that tends to tip the scale. It's when people
start believing it's a problem.

"You're seeing very educated market participants having a fair
amount of resentment toward the Fed for the enormity of its
purchasing [of U.S. treasuries]. That's the qualitative slip that
you have to worry about.

"You're going to see on the front page of newspapers here in the
next 50 to 60 days that reads: 'The Federal Reserve Bank of the
United States becomes the largest U.S. Treasury owner, ahead of
Japan and China.'

"I don't know how the world is going to take that headline.

Where will we be a year from now? "That's the proverbial
trillion-dollar question."

Michael Cox, director of the William J. O'Neil Center for Global
Markets and Freedom, SMU

"The Fed is trying to create some inflation. That's what the
economy needs right now.

"Despite the fact that the Fed increased the base money from
$825 billion to $2.3 trillion over the past couple of years, the
money supply still did not rise. When the banks got that money,
they did not loan it out.

"The bank reserve-to-deposit ratio jumped way up from what had
been two-thirds of one percent to more than 14 percent. The bank
reserve-to-deposit ratio had never been above 4.5 percent in the
last 50 years.

"When the Fed 'prints currency,' they use that currency to buy
securities typically held by commercial banks and then those
commercial banks have more currency, so they have more reserves in
their vaults.

"Then banks loan that money to businesses. Businesses take the
money and invest in projects. Then they spend the money, and the
money comes back into the bank. The money supply grows by multiples
of what the Fed's injected.

"But none of that happened over the past two and a half
years.

"When the Fed printed all this currency from $825 billion to
$2.3 trillion, it did not result in any increase in the money
supply. In fact, it fell a little bit.

"We've been flirting with deflation for two years. That's really
bad for the economy. This is a carefully engineered yet somewhat
desperate attempt to get money supply to rise so that prices will
rise.

"It's not that the Fed is trying to get long-term interest rates
down. It sells to say, 'We're going into the long-term market and
hold down long-term rates.' But the real objective is to create
some inflation.

"I think we're looking at 4 to 5 percent. I told the Fed when I
left a year and a half ago to create some inflation.

"When the Fed let prices fall in this recession, they
essentially helped drive down real estate price throughout the
country. That turned people upside-down on their mortgages, caused
bankruptcies and a lot of problems.

"There's a wealth effect on spending: The wealthier people feel,
the more they tend to spend. When you reduce their wealth, you
reduce their spending. You get a negative wealth effect.

"The Fed has to reverse both of those things that deflation
caused. The solution is inflation.

"When interest rates get really, really low like they have
recently, you get into a liquidity trap. It's like pushing on a
string. You can push the front of a string, but you can't get the
back part to move. The Fed can push currency into the economy, but
they can't get the overall money supply to rise.

"Banks won't make loans because who wants to loan at such low
rates?

"If you know rates are going up, you wait to loan money until
they do. You don't want to have money loaned out at 3 or 4 percent
interest when you think next year you might get 7 or 8 percent
interest.

"This is exactly the right thing to do. The solution is higher
interest rates. How you get higher interest rates is inflation.

"Once the Fed pushes enough base currency into the economy,
eventually you're going to have inflation.

"It's a slippery slope. Once you get over the hump, you have the
potential for a rapid increase in money supply. Then they'll have
to pull the money back out of the economy to keep it from becoming
rampant inflation.

"The $600 [billion] is a cautionary step. They can always do
more later if they need to.

"Don't get me wrong. This is the least painful but not a
painless solution. It's going to hurt people, particularly those on
fixed-income pensions.

"Two years of 4 [percent] to 5 percent inflation will reduce the
value of people's pensions by 10 percent in real terms. So at most,
you want this kind of policy for two years to make sure you've done
it long enough to be firmly out of this recession.

"Then you want to cut inflation back to the 2 [percent] to 3
percent range.

"Over the 87 years, from 1939 to 2009, we had about 3.8 percent
inflation coming from the Fed. If you look historically at what
effect that had on the business cycle, the number of business-cycle
downturns got cut by more than in half.

"The message is: A little bit of inflation cures a lot of
recession. And if we've ever needed a cure, we need it right
now."

Norm Bagwell, chairman and chief executive, Bank of Texas

"$600 billion is not as large as the last round of easing - that
was $1 trillion. But this may not be the end of this program. There
could possibly be a similar move down the road if necessary.

"It looks like the Fed is trying to purposely increase
inflation. The Fed is balancing the short-term risk of a double dip
vs. the longer-term risk of inflation. They have chosen to risk the
latter to prevent the former.

"This action can be viewed as a positive move in the short
run.

"In theory, this type of move helps asset values that benefit
from inflation (risk assets, commodities, etc.). Rising asset
prices can actually have a positive impact on consumer confidence.
The consumer is the key ingredient to getting the economy moving
again.

"The lower dollar may possibly spark new business activity and
exports.

"Inflation up to 1 percent is no big deal. Inflation from 1
percent to 2 percent is probably the warning zone.

"Most people believe the current economy needs some minimal
level of inflation. Even with easing, the Fed appears confident
that it can keep inflation in check. The Fed will need to be
prepared to take aggressive action to prevent inflation from
getting out of control.

"A year from now, unmanageable inflation would not have been
worth the easing in my opinion."

Cece Smith, retired venture capitalist

"First, what is it? The Fed is going to buy up to $600 billion
in government bonds to further reduce interest rates and increase
liquidity in the system - in other words, print more money.

"Since interest rates are already essentially at zero, they
can't use the usual methods in their tool box, so they are taking
this more unorthodox approach.

"They are concerned about deflation and hope that these actions
will increase inflation.

"Second, what will it do? While it will undoubtedly reduce
interest rates somewhat further, I am not sure that it will have
much impact.

"They also run the risk that they cannot calibrate inflation
precisely, and it may end up higher than their 2 percent goal,
which will cause other problems.

"If all of that will stimulate the economy and get growth going,
I think it will only be at the very margin. Mortgage rates or
car-loan rates may come down a little more and spur some housing or
auto activity.

"Companies that are in a position to issue bonds or refinance
debt will be able to do it at a slightly lower rate, which is
always good, but many companies have already taken advantage of the
current low rates to do that.

"There is no shortage of liquidity right now. When I think about
the companies I work with, the Fed's decision to do this is not
going to be useful as a planning tool.

"It is not as though you read the headline: 'Fed to do $600
billion of QEII,' and think 'Oh, good, this will be good for our
business.' I don't think they will make decisions based upon
additional easing. They are not going to add jobs based upon
interest rates being lower. They will add jobs based upon increased
demand for their products or services.

"The hope is that one leads to the other, but it is very
indirect and more long-term. In addition, it continues to hurt
savers, which no one ever thinks about."

Hasan Pirkul, dean, UTD School of Management

"However you measure it, $600 billion is a significant amount.
It will have both short- and long-term effects, particularly when
you consider it as a strong signal from the Federal Reserve that
they will fight the 'double dip' with everything they have.

"Short-term effects are more predictable than the long-term
effects.

"In the short run, it will help boost the economy that is
already starting to show signs of improved recovery.

"Predicting long-run effects is more complicated because it
depends on what will the government as well as the Federal Reserve
do. If the Federal Reserve removes excess liquidity in a reasonable
manner, and if budget deficits can be controlled, we might get away
with this move. Otherwise the likely long-term effect is higher
inflation."

Bob McTeer, distinguished fellow, National Center for Policy
Analysis

"If you watch cable TV, you'll hear people talk about the Fed
pushing down interest rates. I don't think that's their main goal.
Their main goal is to stimulate the economy.

"They have stated that the inflation rate has gotten too low,
and they're worried about deflation. The unemployment rate is too
high. They're worried if they get too close to zero, they'll lose
control and it will go below zero.

"I really regret them talking about getting the inflation rate
up. To me, zero inflation is the ideal target.

"I don't agree with everything they are doing. I wish they had
kept their mouth shut. If they needed to pump more reserves into
the system, just do it. Don't talk about it. I don't think they
should have announced an amount like $600 billion or a timetable
like the middle of next year. I sort of understand why they
did.

"There are two sides on inflation. Some people have been
predicting for the past two years that the Fed is creating
inflation. And what has inflation done? It keeps coming down. So
that side has a proven record, and it isn't very pretty.

"When people hear about quantitative easing, they say, 'Oh my
God! The Fed's printing money!' Well, yeah they are, but that's
what they do. It's not that they're doing something so different.
It's just a matter of degree.

"They say, 'Oh, my God! The Fed is debasing the currency! The
dollar is going to weaken.' Well maybe, maybe not.

"My big gripe is everybody's treating this as a very unusual,
draconian thing that's extremely risky, probably won't work and
likely to have adverse consequences.

"I think they're overdoing it. There's nothing to fear.

"The difference today is the system is clogged. The reserves are
getting into the banks, but the banks aren't able to convert it
into money for two reasons. Number one: loan demand by really
credit-worthy borrowers is weak. Number two: banks are still trying
to protect their capital. They are very reluctant to turn loose of
their reserves."

But it still might not shake the money loose, right? "Yeah, it's
a horse to the water thing."